Why Osborne's new lending scheme won't work

If consumers are determined to hoard cash, who will borrow?

The likelihood is that George Osborne's new bank lending scheme, announced last night in his Mansion House speech, will neither revive the economy nor the Tories' moribund poll ratings (they currently trail Labour by 12 points).

Osborne has always said that he and David Cameron are "fiscal conservatives but monetary activists" and more monetary activism is what we're getting. Under a new "funding for lending" scheme, worth up to £80bn, the Bank of England will provide cheap loans to banks for several years, at below market rates, in exchange for them lending the money to households and small and medium-sized businesses. In addition, the snappily-titled Extended Collateral Term Repo Facility will lend banks a minimum of £5bn a month in the form of six month loans to them. The aim of both schemes is to stimulate the economy by increasing loans to credit-starved businesses and households. But will they work? Almost certainly not.

There is increasing evidence that the UK is caught in a liquidity trap, a situation in which confidence is so low that looser monetary policy (e.g. increasing the money supply or lowering interest rates) has no positive effect on the economy. If consumers and businesses are determined to hoard cash (as is common in a recession), then the new loans will not be taken up. As for those willing to borrow, many are so indebted that the banks won't lend to them anyway. Put simply, the creditworthy won't take loans and the uncreditworthy won't get them.

It is in such circumstances that the government must act as a spender of last resort and engage in fiscal stimulus (higher spending and lower taxes), as Ed Balls has repeatedly argued. Since Osborne is so fond of boasting of the UK's historically low bond yields (although they owe more to the Bank of England's quantitative easing programme than to his deficit reduction programme), the least he could do is take advantage of them. He should increase borrowing to fund higher infrastructure spending (the most effective stimulus, according to the Office for Budget Responsibility) and tax cuts.

As for the politics, they're not great for Osborne either. As Tory MP Douglas Carswell, an increasingly vociferous critic of the Chancellor, noted on Twitter: "Print-money-and-give-to-banks (govt) V Print-money-and-give-ppl (Balls). Guess which will play better in studio debates?"

In a recent essay in the New York Review of Books, Paul Krugman sagely observed that "the economic strategy that works best politically isn’t the strategy that finds approval with focus groups, let alone with the editorial page of The Washington Post; it’s the strategy that actually delivers results." If Osborne wants to restore his political reputation (he is both Chancellor and the Tories' chief election strategist) and give the Tories a faint hope of forming another government, he should adopt a plan that works. But first he must learn the lesson of the 1930s - you can't cut your way out of a recession, but you can spend your way out of one. And in these depressed times, only big government has the firepower to do so. 

Chancellor George Osborne delivered his annual Mansion House address last night. Photograph: Getty Images.

George Eaton is political editor of the New Statesman.

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I believe only Yvette Cooper has the breadth of support to beat Jeremy Corbyn

All the recent polling suggests Andy Burnham is losing more votes than anyone else to Jeremy Corbyn, says Diana Johnson MP.

Tom Blenkinsop MP on the New Statesman website today says he is giving his second preference to Andy Burnham as he thinks that Andy has the best chance of beating Jeremy.

This is on the basis that if Yvette goes out first all her second preferences will swing behind Andy, whereas if Andy goes out first then his second preferences, due to the broad alliance he has created behind his campaign, will all or largely switch to the other male candidate, Jeremy.

Let's take a deep breath and try and think through what will be the effect of preferential voting in the Labour leadership.

First of all, it is very difficult to know how second preferences will switch. From my telephone canvassing there is some rather interesting voting going on, but I don't accept that Tom’s analysis is correct. I have certainly picked up growing support for Yvette in recent weeks.

In fact you can argue the reverse of Tom’s analysis is true – Andy has moved further away from the centre and, as a result, his pitch to those like Tom who are supporting Liz first is now narrower. As a result, Yvette is more likely to pick up those second preferences.

Stats from the Yvette For Labour team show Yvette picking up the majority of second preferences from all candidates – from the Progress wing supporting Liz to the softer left fans of Jeremy – and Andy's supporters too. Their figures show many undecideds opting for Yvette as their first preference, as well as others choosing to switch their first preference to Yvette from one of the other candidates. It's for this reason I still believe only Yvette has the breadth of support to beat Jeremy and then to go on to win in 2020.

It's interesting that Andy has not been willing to make it clear that second preferences should go to Yvette or Liz. Yvette has been very clear that she would encourage second preferences to be for Andy or Liz.

Having watched Andy on Sky's Murnaghan show this morning, he categorically states that Labour will not get beyond first base with the electorate at a general election if we are not economically credible and that fundamentally Jeremy's economic plans do not add up. So, I am unsure why Andy is so unwilling to be clear on second preferences.

All the recent polling suggests Andy is losing more votes than anyone else to Jeremy. He trails fourth in London – where a huge proportion of our electorate is based.

So I would urge Tom to reflect more widely on who is best placed to provide the strongest opposition to the Tories, appeal to the widest group of voters and reach out to the communities we need to win back. I believe that this has to be Yvette.

The Newsnight focus group a few days ago showed that Yvette is best placed to win back those former Labour voters we will need in 2020.

Labour will pay a massive price if we ignore this.

Diana Johnson is the Labour MP for Hull North.